Today, we explore the sales tax breaks different states offer to parents, and how those breaks impact the economy.

Back to school

Which Purchases Are Tax-Exempt?

In recognition of back-to-school time, several states suspend their sales taxes on commonly purchased supplies. As TaxAdmin.org shows, these supplies most typically include:

• Clothing
• Footwear
• Computers
• Notebooks
• Pencils/Pens
• Staplers
• Markers
• Binders
• Sports equipment
• Backpacks

Each state exempts a different amount of each purchase. For instance, Alabama enables shoppers to shield $100 worth of clothing, $750 worth of computer equipment, $50 of school supplies, and $30 of books from sales tax. In practical terms, this purchase would equate to a sales tax savings of $37.20 (based on Alabama’s 4% tax rate.) TaxAdmin.org’s chart lists the specific exemptions for each participating state: Alabama, Arkansas, Connecticut, Florida, Georgia, Iowa, Louisiana, Maryland, Massachusetts, Mississippi, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia.

Do Consumers Save as Much as They Think?

In an August article on potential downsides to sales tax holidays, TimeMagazine argues that consumers may not be saving as much as they think. For one thing, in a retail environment, it’s common to see 20%-30% off sales periodically throughout the year, irrespective of whether it’s back to school time or not. In light of this, taking 4% or 8% off is rarely a compelling reason to visit the store (unless, of course, a sale is currently in effect too.)

Instead, Time cautions shoppers not to get caught up in sales tax exemptions to the point of ignoring the big picture. If you were not already planning to buy school supplies or a new computer, do not let the absence of a sales tax change your buying priorities, as it may not be worth it financially. Additionally, the best promotions that coincide with sales tax holidays are on clothing. If your child objectively needs a new wardrobe, now can be an excellent time to purchase it.

Unplanned & Fully Taxed Purchases During Sales Tax Holidays

According to South Carolina’s Cheraw Chronicle, many states actually increase their overall sales tax revenues during the back-to-school tax holidays. How can this be? Simple. While shoppers are stocking up on tax exempt items like clothing and backpacks, they tend to make taxable purchases that more than make up for the sales tax they are saving: for instance, trips to mall food courts, or unplanned “impulse buys” of items not covered by the exemptions.

Additionally, increased jobs and payroll taxes (resulting from the needs for higher staffing during the tax holiday) tend to increase the state’s take, too. Thus, on net, most states end up better off than they were before the back-to-school exemptions.

Stimulus, or Shifted Timing?

Finally, there is some question about whether back-to-school sales tax holidays actually increase sales for retailers. On the surface, the question seems silly to ask. But in a Tax Foundation study referenced by Time, a fascinating conclusion emerges. Sales tax holidays, rather than driving new and higher sales volumes, simply cause consumers to shift the timing of purchases they were already going to make. Rather than buying earlier in the summer (or later in the fall), shoppers just wait for the sales tax holiday and make all their back-to-school purchases within that window.

In spite of this, retailers are said to love the tax holidays because they amount to “free advertising for what is effectively a paltry 4 to 7 percent sale.” Nevertheless, the Tax Foundation says the holiday is a gimmick, and a “poor tax policy”, stating that if lawmakers truly wanted to save us money, they would cut sales tax rates all year.

The Takeaway

Taking everything into account, shoppers are advised to utilize sales tax holidays only when they coincide with larger sales, and/or if they were already going to buy the exempt items in question. Buying simply because of the tax holiday, and in spite of a pre-existing need, could be a waste of money.

sales tax holiday

The first sales tax holiday was in New York in January 1997, to boost sales during the after-holidays retail slump. Now seventeen states are offering sales tax holidays, though New York is no longer doing so.

The sales tax holiday is usually three days, from Friday through Sunday, during a major shopping period such as just before school starts. The holiday applies to selected items, such as clothing and school supplies, and is often restricted by price, for example, clothing up to $100.

If you want to take a vacation from sales tax this summer, consult the list below to see when one is offered in your state, and then head for the air-conditioned mall to beat the summer heat and take advantage of the savings.

Happy shopping!

The tax law requires your employer to withhold federal income tax from each paycheck you receive and send it to the IRS on a quarterly basis. If you are self-employed, you are required to make income tax payments every three months throughout the year. At the end of the year, your employer provides you with a W-2 statement that reports the total amount of tax you paid during the year. When you prepare your tax return and the amount you owe is less than the total amount withheld, the IRS will refund the difference to you.

Filing exempt from withholding

When you start a job, your employer will ask you to fill out IRS Form W-4. The W-4 estimates the amount that should be withheld from each paycheck based on the tax information you provide. To claim an exemption from withholding, you must meet certain criteria. If you had even $1 of tax liability in the prior year or anticipate earning income in excess of the sum of your standard deduction and exemption, you cannot be exempt from federal tax withholding in the current year. For example, if you file as single for 2010 you must not anticipate earning income in excess of $9,350. This is a combination of your standard deduction of $5,700 and your personal exemption of $3,650. If you still file exempt and earn income in excess of this amount, unless you qualify for a refundable tax credit, it is impossible for you to receive a refund since no federal income tax is taken from your paycheck.

Claiming allowances on the W-4

If you are unable to claim exempt from withholding, you can still reduce the amount that is withheld from each paycheck by claiming allowances on your W-4. The more deductions you anticipate claiming at the end of the year, the more allowances you can take. These allowances are based on your filing status, the number of dependents you claim plus the itemized deductions you anticipate claiming such as mortgage interest, state property taxes and medical expenses. However, the IRS will impose penalties on you if you significantly underpay your actual tax liability due to filing exempt or claiming too many allowances.

Refundable tax credits

A refundable tax credit means that even if you have a zero tax liability before claiming the credit, you can still obtain a refund for a portion of the credit. For example, the American opportunity credit that covers certain higher educational expenses is 40 percent refundable. Therefore, if you qualify for the maximum $2,500 credit, you will get a refund of $1,000 (40 percent of $2,500) even if you paid no income tax for the year.